Study estimates $2 million a month in Bitcoin drug sales

Revenues of the drug marketplace Silk Road have doubled since March.

We've noted before that the cryptocurrency Bitcoin has been adopted enthusiastically by those engaged in legally dubious pursuits like gambling and drug purchases. Forbes points us to a new study that backs up this proposition with hard data.

Nicolas Christin, a researcher at Carnegie Mellon, monitored the online marketplace Silk Road over a period of months. The research turned up some striking statistics about the volume and distribution of transactions made on the secretive site, which primarily facilitates drug deals.

Silk Road sellers have collectively had around $1.9 million of sales per month in recent months. Almost 1,400 sellers have participated in the marketplace, and they have collectively earned positive ratings from 97.8 percent of buyers. And the service is growing, with Silk Road's estimated commission revenue roughly doubling between March and July of this year.

Traveling the Silk Road

Silk Road is an online marketplace that uses Tor and Bitcoin to preserve the anonymity of all involved. The site itself is set up as a Tor hidden service, which makes it practically impossible to locate the site's servers. And the use of Bitcoins prevents the authorities from identifying market participants by following the money.

Most of the items listed for sale are illegal drugs. To place an order, the buyer transmits the appropriate number of Bitcoins to the site operators, who hold the funds in escrow while the goods are shipped. Once the buyer confirms the product has arrived, the escrowed funds are released to the seller.

Christin began crawling Silk Road in November 2011. From February to July of this year, he attempted to crawl the site on a daily basis, yielding a wealth of data about activity on the site.

Silk Road buyers are required to provide feedback on their purchases, and these reports are publicly available. This gave Cristin a handy way to track the volume of activity on the site. He reports that the volume of transactions on the site increased "from approximately 8,000 BTC/day to approximately 15,000 BTC/day, before seemingly retreating down to 11,000 BTC/day. The latter decrease is, however, an artifact of the Bitcoin sharply appreciating against all major currencies, rather than an indication of a drop in sales."

The growing volume of transactions has been lucrative for whoever operates the site. Christin estimates that Silk Road's operator earned an average of $143,000 per month during the period he was monitoring the site. And revenues have been increasing rapidly:

Enlarge/ Estimated revenues of Silk Road operator. Silk Road switched fee schedules partway through the study, so Christin estimated revenue that would be generated under either scheme.

Satisfied customers

In total, Cristin found 24,422 items available for sale. The online marketplace is dominated by drugs that are illegal in the United States and most other jurisdictions. Marijuana and related products topped the list, accounting for more than 20 percent of items available. Prescription drugs accounted for another 15 percent of the items. "Harder" drugs, including cocaine, ecstasy, and heroin, were also available, but they were much less common than marijuana.

All these transactions are being generated by a relatively small number of merchants. Christin observed 1,397 distinct sellers over the months he observed the site, but many of the sellers only stuck around for a short period. Just 58 sellers were offering their wares for the entire period of the study.

Sellers who disappear from the site's public listings haven't necessarily abandoned the site completely. Silk Road allows sellers to operate in "stealth mode," serving customers on an invitation-only basis. Cristin speculates that some sellers pop up on the site, spend a few weeks building up a customer base, and then switch to stealth mode to continue serving the customers they already have. That means Cristin has likely understated the true volume of transactions on Silk Road.

Fraud does occur, though. In one case, a seller who had previously had a good reputation cut his prices by 20 percent in order to generate a large volume of sales, and then disappeared from the site without delivering the products customers had ordered. Because Bitcoin transactions are irreversible, those buyers that had already released their funds from Silk Road's escrow service found themselves out of luck.

Still, most sellers appear to be behaving themselves. On a five-star rating scale, 96.5 percent of buyers gave five-star ratings, and 1.3 percent gave four-star ratings. Just 1.1 percent gave the lowest rating of one star.

So far, the world's law enforcement agencies don't appear to have done much to combat Silk Road's growth. Two weeks ago Australian government officials bragged about catching one Silk Road user, but that arrest represents a tiny fraction of the tens of thousands of transactions the site has facilitated.

Timothy B. Lee / Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times.